Business context and reporting period
Standard Motor Products, Inc. manufactures and distributes replacement automotive parts, with complementary heavy-duty, industrial-equipment and original-equipment service businesses. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the first quarter of 2016. Figures below are in millions of dollars except per-share data.
Financial performance and position
- Revenue: Net sales were $282.4, up 18.2% from $238.9. Engine Management sales rose 17.0% to $211.3; Temperature Control sales increased 23.8% to $70.3.
- Profit and margins: Gross profit was $84.1 versus $73.0, but gross margin declined to 29.8% from 30.6%. Operating income increased to $25.5 from $20.0; operating margin rose to approximately 9.0% from 8.4%. Continuing-operations earnings were $16.4 versus $12.7; net earnings were $15.7 versus $12.2. Diluted EPS was $0.67 versus $0.53. The quarter included a $0.6 loss from discontinued operations, primarily asbestos-related legal expenses.
- Cash flow: Operating activities used $26.9, compared with $1.3 used in Q1 2016, primarily reflecting increases in receivables and inventory. Investing activities used $3.2, mainly capital expenditures. Financing activities provided $25.3, including $27.2 of net revolving-credit borrowings. Cash ended the quarter at $15.6, down from $19.8 at year-end 2016.
- Liquidity and debt: Current assets were $534.5 and current liabilities $327.9 (current ratio approximately 1.63). Total debt was $82.2, mostly revolving borrowings; the facility had $149.2 of additional formula-based availability. Revolver borrowings were classified as current. The weighted-average facility rate was 2.3%. The company was not subject to the facility’s fixed-charge coverage covenant at quarter-end.
- Other: The company declared a $0.19-per-share dividend, up from $0.17. It repurchased 32,367 shares for approximately $1.6 under a newly authorized $20 million program. Comprehensive income was $18.4, including $2.7 of foreign-currency translation gains.
Material changes versus the prior comparable period
- The May 2016 General Cable ignition-wire acquisition materially contributed to growth: acquired-business revenue included in Q1 2017 was $23.4. Wire and cable sales increased 73.7%; excluding acquisition sales, Engine Management revenue rose 4.0%.
- Temperature Control growth was led by compressors, whose sales increased 38.8%; management cited higher production volumes as a factor in that segment’s gross-margin improvement.
- Consolidated gross margin fell 0.8 percentage points. Management attributed the Engine Management decline to lower margins at the acquired wire business; Temperature Control margin improved 0.4 percentage points.
- SG&A increased to $57.4 from $53.0, but declined as a share of sales to 20.3% from 22.2%. Higher acquisition-related costs, amortization, selling and distribution costs, and receivables-factoring charges contributed to the increase.
- Restructuring and integration expense increased to $1.5 from $0.2. Interest expense rose to $0.5 from $0.3, reflecting higher average borrowings after the acquisition.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects operating cash flow, available cash and revolver capacity to meet liquidity needs for at least the next 12 months, subject to no material adverse developments.
- Management noted seasonal sales peaks in the second and third quarters, particularly for Temperature Control products, and typically higher working-capital needs near the end of the second quarter. Demand can vary with summer weather and customer inventories.
- Three facility rationalization or relocation programs are underway. Expected costs include approximately $11.0 for the Grapevine-related program, $3.9 for wire-and-cable relocation, and $3.7 for the Orlando program. Completion was expected by the end of 2017, first-quarter 2018, and by the end of 2018, respectively.
- Receivables factoring remains an important source of working-capital support: $179.7 of receivables were sold in the quarter, at a $5.2 charge. Management warned that termination of these arrangements or financial difficulties at counterparties could adversely affect collections, results and cash flows.
- Asbestos exposure remains a contingency. About 1,580 cases were outstanding; recorded asbestos liabilities were $30.4. The latest actuarial study estimated undiscounted settlement payments of $31.0–$47.7 through 2059, excluding legal costs and possible insurance recoveries; projected legal costs were $42.7–$78.6. The company stated that estimates are uncertain and additional provisions may be required.
- Other litigation includes commercial, product-liability, employment and environmental matters. Management did not expect current matters, individually or collectively, to have a material adverse effect, but noted outcomes and potential payments are uncertain.
- Substantially all debt was variable-rate. The filing estimated that an unfavorable 100-basis-point change in the factoring margin rate could have an approximately $1.8 adverse impact on quarterly earnings or cash flows. Foreign-currency monetary exposures were described as immaterial.
Important facts for investors to verify
- How much of reported sales growth and future performance depends on the General Cable acquisition, and whether its margins improve.
- Whether the large working-capital use, receivables and inventory growth, and reliance on receivables factoring reverse as seasonal sales convert to cash.
- Progress, remaining costs and expected savings from the three restructuring and relocation programs.
- Revolver availability, borrowing levels and covenant headroom as seasonal funding needs rise.
- Changes in asbestos claims, actuarial estimates, recorded reserves and potential insurance recoveries.
- Whether Temperature Control demand and margins hold up through the seasonal selling period and varying summer weather.